Monthly Archives: May 2015

Franchise Renewal – Pitfall For Franchisees

May 7, 2015 - Franchise Articles by |

FRANCHISE RENEWAL: THEY’VE GOT YOU COMING AND GOING Franchise Renewal has always been a hot topic in the franchise world. Not surprisingly, most, but not all, of the legal history on the franchise renewal issue shows franchisees to be the definitive losers. Historically, in most instances, franchisees have argued that a right to renew should always be available, regardless whether such a right exists in the franchise agreement, and franchisors have contended that no such right should exist, unless it is explicitly provided for in the franchise agreement. Wrongful non-renewal cases are frequently handled by the franchise attorneys at Goldstein Law Firm.  Absent the applicability of state or federal franchise legislation, the underlying legal principles that govern most franchise renewal disputes include: (1) any contract, including a franchise agreement, will remain in effect until the end of the term identified in that agreement; (2) unless the agreement contains a right to renew, neither of the parties has a right to renew; (3) if the agreement does contain a right to renew, and the electing party chooses to renew, the agreement will be renewed only on the terms identified in the agreement. Where no renewal provision is explicitly included in the franchise agreement, and where no state or federal statute can be used to imply such a renewal right, the court will usually never imply such a term. The common law has a clear and definitive penchant for limiting the duration terms of contracts absent the parties’ expressed crystal clear intention to provide for renewals. […]

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Ladies of the Night – Franchise Underreporting

May 7, 2015 - Franchise Articles by |

LADIES OF THE NIGHT AND FRANCHISEE UNDERREPORTING What is franchise underreporting? If you have to ask, and you’re a franchisee, you’re probably not doing it. But, then again, maybe you are; unwittingly. In its simplest incarnation, franchisee underreporting occurs when a franchisee “reports” to his franchisor less income or sales than what he actually makes or earns. Franchise underreporting is a very dangerous area of franchisee wrongdoing, and courts have little sympathy for franchisees who fail to report all revenues. Historically franchisors have focused almost exclusively on trying to sell as many franchises as possible, not on trying to augment their revenues through under reporting investigations. Not only were audits time-consuming and expensive, but they engendered considerable bad-will in the franchise community. Soon, however, audits became “the in-thing.” A cottage industry was born. A savvy franchisor law firm said: “Hey; wait a minute. If I’m able to guarantee my franchisor client that by using my new “auditing program” it will be able to at least cover my lawyer’s fees with the increased revenues from the alleged franchisee under reporters this will be a ‘win-win’ situation; at least for everyone but the falsely accused franchisee under reporter. Some franchisors, including one of the very biggest coffee and doughnut franchisors in the world, in consultation with leading “statistical wizards” from mathematical departments of major universities, thereafter devised cutting-edge forensic models capable of easily identifying underreporting. These models were so effective and potent that they were able to definitively identify underreporting even where none […]

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Accountability in a Franchise Advertising Fund

May 7, 2015 - Franchise Articles by |

Disclosure And Accountability In Franchise Marketing Or Advertising Fund There should be greater Franchisor disclosure and accountability concerning the expenditure of marketing and reservation fees collected from Franchisees that are held in a franchise advertising fund. On an annual basis, Franchisors should disclose how the marketing and reservation fees are spent, including identifying the specific products and services that are paid for with the fees. A Franchisor should not profit directly from the marketing and reservation fees it collects from the Franchisees, or use such fees to pay for marketing and advertising related to a Franchisor’s sale of hotels. Franchisors should have their books and records audited on an annual basis concerning the collection and disbursement of marketing and reservation fees, and should share the results of the audits with the Franchise Advisory Councils (FACs), or the designated audit committees of the FACs. Putting the Cards on the Table Almost all franchise agreements establish advertising and marketing funds into which franchisees make regular periodic payments. Some franchise agreements also require franchisors, in addition to their franchisees, to make contributions to these funds, and others do not. In contrast to most other obligations of franchisors in franchise agreements, the duties and obligations assumed by franchisors in administering and spending monies in the fund are delineated with much greater certainty. This is for two reasons. First, UFOC disclosure rules require that franchisors describe in their disclosure documents all aspects of their advertising programs by answering a list of very detailed questions, including: […]

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Franchise Trademark Infringement

May 7, 2015 - Franchise Articles by |

FRANCHISEES: WATCH OUT FOR THOSE SIGNS AFTER TERMINATION OR EXPIRATION If you've decided to end your status as a franchisee, you should be concerned about potential franchise trademark infringement. Maybe you are unhappy with the ability of your brand to attract business, or maybe you are tired of splitting your revenues with the franchisor each month. Regardless of your reasons to end the franchise affiliation, if you intend to continue operating your business as a non-franchise, you will need to protect yourself after the break-up from claims by your former franchisor that you are not entitled to operate your business under any circumstances, franchised or independent. Many times, such claims by a franchisor arise when a departing franchisee opts to continue using his old franchise signage, which the departing franchisee has altered in only minor respects. While it is understandable that many former franchisees may be inclined to continue using existing signage and logos (especially considering that these items frequently cost tens of thousands of dollars), it is important that the former franchisee, in such circumstances, take adequate precautions to assure that the signage is not confusingly similar to the former franchisor’s marks. In most cases this will require the franchisee to entirely replace the former franchisor’s signage. In a very recent case, the United States District Court for the Middle District of Florida ruled on a dispute that arose when a former Howard Johnson franchisee continued to use a modified version of his former franchise signage. Specifically, the franchisee modified […]

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Franchisor Encroachment

May 7, 2015 - Franchise Articles by |

Franchisor Encroachment: Beware of Your Franchise Agreement As with most issues in franchise law that end up in litigation, your chances of prevailing in court against your franchisor on a claim that the franchisor has violated your exclusive territory may be wholly dependent on the specific language that you and your lawyer were successful in having included in your franchise agreement. Also, as you will see below, the legal analysis that must be undertaken to negotiate a franchise agreement to fully protect a franchisee from all types of potential encroachment is too complex and esoteric to be performed adequately without expert legal assistance. I have encountered prolific cases where the franchisee, whose business has been decimated by encroachment, has told me that he “thought” that the language he had personally negotiated and included in the franchise agreement granted him an exclusive territory. In many of these cases, contrary to the beliefs of these franchisees, the franchise agreements contained no language whatsoever regarding an exclusive territory. In other cases, even where the franchise agreement did contain some language relating to an exclusive territory, the language actually gave the franchisor explicit permission to open competing franchises anywhere that the franchisor chose to put them. Although the specific language in a franchise agreement addressing or relating to an exclusive territory often differs for each franchise brand (and many times even within the same brand), it is possible to categorize “exclusive territory” language into four general types: (1) language that grants a franchisee only […]

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Advertising Funds and Hotel Franchises

May 7, 2015 - Franchise Articles by |

DISCLOSURE AND  ACCOUNTABILITY OF ADVERTISING FUNDS IN HOTEL FRANCHISES There should be greater Franchisor disclosure and accountability concerning the expenditure of marketing and reservation fees collected from Franchisees. On an annual basis, Franchisors should disclose how the marketing and reservation fees are spent, including identifying the specific products and services that are paid for with the fees. A Franchisor should not profit directly from the marketing and reservation fees it collects from the Franchisees, or use such fees to pay for marketing and advertising related to a Franchisor’s sale of hotels. Franchisors should have their books and records audited on an annual basis concerning the collection and disbursement of marketing and reservation fees, and should share the results of the audits with the Franchise Advisory Councils (FACs), or the designated audit committees of the FACs. Putting the Cards on the Table Almost all franchise agreements establish advertising and marketing funds into which franchisees make regular periodic payments. Some franchise agreements also require franchisors, in addition to their franchisees, to make contributions to these funds, and others do not. In contrast to most other obligations of franchisors in franchise agreements, the duties and obligations assumed by franchisors in administering and spending monies in the fund are delineated with much greater certainty. This is for two reasons. First, UFOC disclosure rules require that franchisors describe in their disclosure documents all aspects of their advertising programs by answering a list of very detailed questions, including: what media the franchisor may use; whether media […]

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Unenforceable Oral Franchise Applications

May 7, 2015 - Franchise Articles by |

UNCERTAIN FRANCHISOR PROMISES SPELL DOOM FOR FRANCHISEES Unenforceable oral franchise applications lead to much frustration and disappointment in the franchise purchasing cycle. Potential franchisees wishing to purchase a franchise are required to complete an application approval process before a franchise agreement is executed.  In turn, franchisors initially will notify the potential franchisee that the application and “approval” papers will contain explicit language explaining that the franchisor’s “approval” of the franchisee, in itself, does not create a binding franchise agreement.  In addition, since a contract is not enforceable unless certain key provisions are spelled out in specific terms, the franchisor will sometimes express its approval in general, vague language so that it will not be obligated to the franchisee before a written agreement is signed.  Therefore, an “approved” franchisee who has not yet signed a written franchise agreement is probably not in a binding franchise relationship.  In Conner v. Hardee’s Food Systems, Inc., the applicants for a fast-food restaurant franchise learned this lesson the hard way. In that case, Hardee’s Food Systems, Inc. (“Hardee’s”), the franchisor, had contacted the franchisees about a franchise opportunity with the company.  After the parties discussed the opportunity, Hardee’s presented the franchisees with an approval process “checklist” consisting of two components:  an application portion and a development portion.  During the application phase, the franchisees asked Hardee’s representatives several times whether Hardee’s intended to develop company-owned stores in Sevier County, Tennessee, the region in which the franchisees hoped to place their store.  The Hardee’s representatives repeatedly assured the […]

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Avoiding Treble Damages in Franchise Termination Cases

May 7, 2015 - Franchise Articles by |

Legal Update: Avoiding Treble Trouble in Trademark Disputes Franchise termination disputes frequently involve claims by the franchisor that the franchisee has violated the federal trademark or Lanham Act. And, of most interest for the franchisee or dealer, the Lanham Act allows franchisors or the mark-owner to obtain treble damages for a franchisee's use of the franchisor's marks after termination. Accordingly, the job of your franchisee lawyer is to, in part, help you avoid treble damages in franchise termination cases.  Franchise agreements always contain language allowing a franchisee to use the franchisor’s logo and other trademarks. When a serious dispute arises between a franchisor and franchisee, the franchisor in most circumstances will terminate the franchisee and demand that the franchisee immediately de-identify its business. In the face of a franchisor’s demand to the franchisee to “take down the signs,” some franchisees remove all of the franchisor’s trademarks; others, however, refuse to do so. In those cases where the franchisee continues to use the franchisor’s mark and name after the alleged termination date, the franchisor will almost certainly sue the franchisee, alleging that the franchisee’s use of the mark and name is injuring the franchisor. Under the Lanham Act, a federal statute governing use of a trade mark or trade name, franchisors are permitted to seek in court from franchisees triple the amount of damages the franchisors allege they have sustained arising out of the franchisee’s continued use of the name and mark. Under the Lanham Act, a court can award triple […]

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Franchisor Fraud Difficult to Prove

May 7, 2015 - Franchise Articles by |

FRANCHISOR FRAUD USUALLY IMMUNE UNDER FRANCHISE AGREEMENT In cases where a customer is able to show that statements a salesman made are fraudulent, salespeople accused of fraud regularly invoke various legal rules and contract clauses to shield themselves from liability. Franchisors often use these rules and contract clauses to defend themselves when franchisees claim the franchisor misrepresented the terms of a deal. This is significant as cases containing franchise fraud claims are filed almost daily.  First, many businesses, including franchisors, put terms in their written agreements that are called “merger” clauses or “integration” clauses. Basically, these clauses state that the franchisee forgives the salesman for any fraudulent statements the seller may have made to the customer during the sales process. Such clauses also state that the customer agrees never to argue or claim that the seller made misleading statements. Further, a merger or integration clause states that the written agreement is the complete statement of all the agreed-upon terms. The merger or integration clause therefore keeps out of the legally binding agreement any statements or promises made in conversation (unless those statements or promises are finally written into the agreement’s text). This means that in the face of merger and integration clauses in a franchise agreement, a franchisee cannot rely on any promise or statement made by the franchisor or its sales staff if that promise has not been clearly written in the franchise agreement. Like other businesses, franchise companies regularly rely upon merger clauses and integration clauses included in […]

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A Brief Survey of Restaurant Franchise Supply Cases in the Courts

May 7, 2015 - Franchise Articles by |

Wendy’s Supply Restrictions Could Violate the Antitrust Laws Burda v. Wendy's Intern., Inc. (2009) Restaurant franchise supply cases have a great historical significance. In the old days, pre-Reagan, such franchise antitrust claims had notable vitality; nowadays, in contrast, they have little legal strength.  Fast food restaurant franchisee, asserting that franchisor imposed illegal tying arrangement by requiring it to purchase buns and food supplies from particular vendors, sufficiently alleged market power in “tying product.” The franchise agreement did not contain language putting a potential franchisee on notice that franchisor would be able eliminate all competition by naming an exclusive bun supplier or that it could impose a surcharge on approved suppliers, especially in light of the allegations that the market for these supplies was competitive prior to the alleged tie. Sherman Act. Editor’s Note: Although franchisors historically been immune from antitrust claims, the Burda case above, as well as the United States Supreme Court case of Kodak upon which it was based, have provided franchisees with a small window of opportunity in cases where a franchisor requires that its franchisees obtain supplies only either directly from them or from approved suppliers, and the prices of the supplies thereafter increase. In so noting, it is important to understand that this exception applies only in very narrow and complicated circumstances. However, if you are now experiencing issues or concerns regarding purchase of supplies or services it is worth having a franchise attorney examine whether your circumstances might afford you an opportunity to be compensated […]

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